According to Morningstar, alternative investments fall into three camps:
- Nontraditional asset classes, such as currencies and commodities.
- Nontraditional strategies, such as shorting and hedging (in both traditional and nontraditional asset classes). [See information box below.]
- Illiquid assets, such as private equity or private debt.
The most recognized type of investment in this category is the hedge fund, known for its high fees, funds lock-up and sometimes mysterious investment strategies—and available only to high-net-worth investors or institutions.
Read MoreNo, you don't 'need' alternatives
However, since 2008, alternative strategies have been developed for common investors in public, regulated, liquid structures, such as mutual funds or exchange-traded funds, according to Morningstar.
These liquid structures have come to be known as "liquid alternatives," and they are in the midst of an explosion aimed at the retail investor.